Largest Non-Public Companies

Last week’s Financial Times offers a list of the largest companies you know little about. The Non-Public 150 includes the world’s largest state-owned enterprises, private equity companies, partnerships, mutuals, cooperatives, and other non-publicly traded entities. State-owned energy and utility companies (Aramco, Pemex, Petróleos de Venezuela, etc.) top the list but private firms such as Sparkassen-Finanzgruppe (banking), the Nippon Life Insurance Company, and buyout specialist Kohlberg Kravis Roberts Co. are up there as well. (Thanks to the PSD Blog for the pointer.)

Leaving aside the SOEs, why do these firms choose to avoid the public markets? Many people have the impression that only small, local firms are established as cooperatives or mutuals, but the FT 150 list includes some of the world’s largest financial institutions. Organizational scholars have paid relatively little attention to coops and mutuals (Henry Hansmann being the most obvious exception). Private equity has well-known advantages (nicely summarized in Michael Jensen’s “Eclipse of the Public Corporation”) but there is relatively little empirical work on the choice between private and public equity. More work on family firms is needed as well.

Related

Since it is Christmas, I guess Peter can be more tolerant about reader’s self-promotion post. :-) It is well known that strategy research has a bias toward large, public firms. For example, many people send Hallmark’s Christmas cards to their friends at this season, but business analysts virtually know nothing about this company, as Hallmark intentionally avoids IPO in order to keep important competitive information private.

In M&A research, the bias goes to focus on the acquirer side and ignore the target side consideration, due in part to the fact that most targets are private firms. However, acquisitions of private and public firms are qualitatively different. For instance, numerous studies have documented a negative or zero abnormal returns for acquirers of public firms, but recent studies in finance found a significant positive abnormal return for acquirers of private firms. But if so, why do managers acquire public firms in the first place? Are they irrational or making wrong decisions? Or is the market for corporate control is not efficient? I publish a paper, together with Jeff Reuer, at SBE to examine the choice between public and private targets. Based on the finding, Laurence Capron and I publish a paper forthcoming at 2007 SMJ in which we endogneize the choice between public and private targets to examine acquirer returns. We find that on average managers make informed decisions. Acquirers of private firms perform better than if they had acquired a public firm and acquirers of public firms perform better than if they had acquired a private firm. Managers are neither stupid nor irrational on this issue.

“Sparkassen-Finanzgruppe” is listed as private but is in fact state-owned. A “Sparkasse” is not a private company but mostly owned by local authorities, acting independently from other Sparkassen. Recently private banks have attempted to purchase “Sparkassen”. German politicians avoided this by merging the target Sparkasse with another one. There is some pressure on Germany by the EU to privatize the Sparkassen.